My account is up double digits for 2020, but my accountant says I have tax LOSSES?
By: Allison Schmidt, Financial Advisor, CFP®, CPA
I’ve talked to several clients in the past couple weeks that have had a similar question, it sounds something like this…“My accountant told me that I had x dollars (a lot) of losses in my account last year, but I thought my account went up?” Sounds like a bad deal…market was up, but you had losses. It’s actually just the opposite, it’s good news. We intentionally recognized losses (for tax purposes) in your account in a year that the account made money, which is why we consider 2020 one of the best years for non-qualified (aka non-retirement) accounts.
Go on…
Unlike retirement accounts, in non-qualified accounts, you are able to recognize or accumulate losses to use against future gains or taxable income. These accounts require a tax strategy in addition to an investment strategy.
What’s the strategy…
Some call it tax loss harvesting, we call it a “tax offset” process. This is where we constantly evaluate our non-qualified accounts for clients during the year to see if any of the pieces of the portfolio are at losses. The key to this strategy is that you have to make a transaction in order to “recognize” the loss, so you have to actually sell the investment while it is down to be able to use that loss for tax purposes.
So, buy high, sell low?
Just for a moment…the next step in the process is imperative and that is to purchase another investment simultaneously that is “substantially different” but in the same investment “category”…think sell Coke, buy Pepsi. Here you’re able to recognize the loss in the asset for tax purposes, but essentially remain invested in the sector for the eventual recovery.
The benefit…
By accumulating these losses, we are able to do one of two things: First, offset future gains. When the account needs to be rebalanced or you need cash for that vacation this year, (that is LONG over due), we can recognize gains that will be offset by these losses and in effect bring your tax bill down. The second benefit is you can use these losses to offset up to $3k of ordinary taxable income each year until the losses run out…they never expire.
Here are some quick dollars to illustrate:
Bottom line…
Last year, our investment process dictated a number of strategic investment reallocations throughout the year, the most of which occurred between February 19th and March 23rd when the S&P500 fell just shy of 34% in only 4.5 weeks. During that time we traded nearly all of the non qualified accounts that we manage to take advantage of opportunities to recognize losses…what we now fondly call “tax offsets” for our clients to use against future gains or up to $3k of taxable income. From there we saw the market turn on a dime and barrel ahead to end the year up over 15%*. So, we’re happy to report that in 2020, you did in fact have paper or tax losses, in a year that also ended with substantial returns and overall increases to your bottom line.
*Returns of the S&P 500 1.1.2020-12.31.2020 ycharts.com
Securities offered through LPL Financial, Member FINRA/SIPC.
Investment advice offered through Higgins & Schmidt Wealth Strategies, a registered investment advisor and separate entity from LPL Financial.
